How to Know When to Refinance or Pre Pay Your Mortgage
Since last spring, interest rates have risen, which has led to many homeowners pausing for a moment to decide whether or not refinancing a home is really worth it. An individual who is interested in refinancing their loan with a 6% rate will likely find that they don't save as much money as they had hoped if their new loan is at around 4 1/2% now compared to 3 1/2% just last spring. That is not to say, however, that refinancing is not an option worth considering, but it is important for a homeowner to carefully take a look at the numbers to decide whether or not it is the right choice for them.
Other Money Saving Options
If the goal is simply to save as much money as possible on a home loan, an individual may find that prepaying their loan is a much more effective way of saving money rather than refinancing at only a slightly better interest rate. Not only can prepayments allow an individual to save quite a bit of money over the long term of their loan, there is also no need to deal with a bank and go through the hassle of getting a new loan, which means that it is something the average person can put into effect almost immediately.
Making prepayments on a fixed rate mortgage will not save an individual any money on their monthly payments. Because this is one of the primary benefits of refinancing, some individuals may find that this option is not necessarily the best for them. Of course, it is worth keeping in mind that, by paying off the debt earlier than scheduled, making prepayments will make a dramatic difference in the interest costs that a borrower is responsible for, which means that the end result is basically the same for prepayments and for refinancing.
Don't Forget to Factor in Refinancing Fees
An individual who decides to make prepayments will not have to deal with any of the fees associated with refinancing. Because there is also no need to get an approval, an individual won't have to deal with the possibility of their loan application actually being rejected. Even if an individual does get approval for a refinance, they will still be responsible for a variety of fees including appraisal charges, closing costs, and loan origination fees. When combined, these fees can add up to thousands of dollars in additional costs that simply are not there if a person decides instead on making prepayments.